How US rate hike plunges Nigerian markets

The saying, “when America sneezes, the whole world catches cold”, might have proved true for Nigeria as the raise in interest rate to 1.75 per cent by the US Federal Reserve has spooked the local financial markets and opened opportunities for savvy investors.

This might be in line with market expectations and predictions of financial analysts. For instance, Ayodeji Ebo, the Managing Director of Afrinvest Securities Ltd, had predicted US Monetary Policy Normalisation at the beginning of the year when he said:“We have seen what had happened in the UK region. That is expected to impact on what happens within our economy.

“There is new Fed Chairman that will take over in February 2018; we saw that their rates were hiked at least three times last year, and the Bank of England hiked its rate two times last year. The more they tighten their economies in terms of raising rates there, the less the inflows that will be channeled into the emerging and frontier markets.”

True to its analysis, trading at the Nigerian Stock Exchange (NSE) last week ended in turmoil, culminating in the depreciation of its twin indicators – the All Share Index (ASI) and Market Capitalisation – by 1.11 per cent and 0.14 per cent respectively to close at 41,472.10 points and N14.982 trillion.

At the equity section of the market, transactions tanked by about 5 per cent as the total turnover of 2.328 billion shares worth N28.927 billion were traded in 25,530 deals as against2.444 billion shares valued at N36.665 billion traded the previous week in26,712 deals.

The same thing happened to the Exchange Traded Products (ETPs) as a mere 4,165 units valued at N78,276.06 exchanged hands, down from 1.889 million units valued atN10.512 million executed the previous week.

The bond market did not fare better as trading equally nosedived: a total of 5,152 units of FGN Bonds valued at N4.562 million were tradedin 24 deals, compared with 40,566 units valued at N44.313 million transacted the previous week in 29 deals.

As a result of the previous rate tightening, there was a drop in value of business at the Investors & Exporters window of the foreign exchange (forex) market as $6.1 billion traded in January fell to just $3.95 billion in February.

The Federal Reserve met last Wednesday for the first time under Chairman, Jerome Powell, and raised the target range for the federal funds rate by a quarter point to 1.5-1.75 per cent in line with market expectations. Fed officials also projected a steeper path of hikes in 2019 and 2020 as the economic outlook improves. Interest rate in the United States averaged 5.73 per cent from 1971 until 2018, reaching an all time high of 20 percent in March 1980 and a record low of 0.25 per cent in December 2008.

Ebo, however, allayed fears of meltdown, saying “our reserves consistently improved in the last one year from about $23 billion; it currently hovers above $40 billion and this is what some of the foreign investors have seen that gives them confidence. “We have enough arsenal to defend the Naira. Though foreign investors were initially suspicious because of policy inconsistencies, but as activities progressed, they discovered that the Central Bank of Nigeria (CBN) was determined to ensure that this (I & E )window works. So we have seen the foreign inflows that the I & E window has attracted. But we still need to do a lot in terms of attracting Foreign Direct Investments (FDIs).

“As for the capital market, it is not expected to go all up for long time. People will take profit, which provides opportunity for new investors to come in at that particular level. That factor contributed significantly to the rally we saw in 2017 and also sustained into 2018.

“What comes to the mind of potential investors is what is driving the equities market. The total revenue of quoted companies improved in 2016 and quite significantly in 2017. This is what investors look at; it is when you make money that you can pay dividend. For most of the companies, just look at it fundamentally; most of them improved in their earnings. And that cut across all sectors. Within the banking space, the high yield environment contributed to the significant rise in their gross earnings.”

US Monetary Policy Normalisation was one of the factors that contributed to the just-exited recession by the CBN Governor,Mr. Godwin Emefiele. According to him, this had significant adverse effects on Nigeria’s economy, causing“strain on the financial markets with declines in key money market, capital market and foreign exchange market indicators;

“Weakening resilience of the Nigerian banking sector as Non-Performing Loans (NPLs) deteriorated in line with the difficulties of the macroeconomy; and banking system exposure to foreign loans threatened to undermine their health.”

Wall Street Journal, in one of its 2017 editions, however, summed up the scenario: “Global investors’ appetite for emerging market stocks and bonds slumped to its lowest level since the global financial crisis last year (2016), with the biggest hit to inflows coming after Donald Trump’s victory in the US presidential election.”

Accordingly, “foreign investorssent just $28 billion into emerging markets in 2016, 90 per cent lower than the average from 2010 to 2014.”